In M&A transactions, it is common for the parties to include contractual clauses intended to protect buyers in the development of the acquired business and to ensure that sellers receive an additional payment on top of the agreed purchase price. These clauses are known as earn-outs.
In the Brazilian market, earn-outs have been used to mitigate informational asymmetries between buyer and seller, or as a way to keep the seller tied to the business even after the sale, with the goal of ensuring that the know-how, management, and financial performance of the sold company remain stable or continue to grow through the achievement of revenue targets, deliverables, expansion goals, and similar metrics.
It is precisely in this latter scenario, in which the seller remains bound to the business for a set period following closing, that it becomes necessary to consider the impacts of the Tax Reform, among other issues, on the way these contracts are typically structured.
Earn-outs structured as a service arrangement are generally designed to provide for a deferred payment to the seller. This is usually done by including a specific clause in the purchase and sale agreement, together with a separate services agreement in which the parties set out the applicable metrics, amounts, payment terms, and calculation methodology.
Under the Tax Reform, clauses such as earn-outs deserve close attention in the preliminary analyses companies should carry out to align their contractual provisions with the new rules governing the incidence or non-incidence of IBS and CBS.
As a general rule, the transfer of equity interests falls outside the scope of IBS and CBS, as provided in Article 6, item III, of Complementary Law No. 214/2025. Even so, certain particularities need to be taken into account.
A condition attached to part of the purchase price that will only be satisfied at a later date can affect how IBS and CBS apply to M&A transactions with earn-out arrangements tied to future performance.
If the conditional payment is treated as part of the price agreed for the acquisition of the equity interest, it will fall within the non-incidence rule. If, on the other hand, the arrangement is treated as a provision of services, IBS and CBS will apply to that portion of the payment. This is the case, for example, when the earn-out is tied to the continued presence of the selling shareholder who holds the relevant know-how or on whom the company's future performance depends. In that scenario, the arrangement will be characterized as a service, since the payment is understood as compensation for making that know-how available to the business.
Because the amount tied to the earn-out is treated as consideration for services rendered, taxation will occur when the services are concluded, since that is the point at which the payment becomes due under Article 10 of Complementary Law No. 214/2025.
Once the arrangement is characterized as a service under Complementary Law No. 214/2025, the transaction must also be supported by the corresponding tax document, in line with the applicable ancillary obligations.
It is also worth noting that Complementary Law No. 214/2025 provides that, even though the transfer of equity interests is generally not subject to CBS and IBS, the transaction will still be taxed if the acts and legal transactions carried out are, in substance, an onerous supply of goods or services, as set out in Article 6, Paragraph 1. If that is found to be the case, the entire amount of the transaction becomes taxable.
Lastly, these considerations are interpretative in nature, since the structure discussed here has not been specifically addressed by the legislation. Future guidance from tax authorities and the courts may still shape how this type of arrangement is characterized and taxed.